Executory Contract or Lease

By Daisy Rogozinsky
/
June 13, 2022

If you apply for bankruptcy, your executory contracts will be treated differently from your other unsecured claims. In this article, we’ll define the term “executory contract” and explain how they are treated during bankruptcy.

Key Takeaways

  • An executory contract is one in which both parties still have duties to perform
  • Common types of executory contracts include rental leases, equipment leases, development contracts, and agreements between debtors and creditors
  • Executory contracts are given special treatment under the Bankruptcy Code
  • When filing for bankruptcy, the debtor is able to decide whether to assume or reject their executory contracts
  • The debtor must decide if they are assuming or rejecting their executory contract within 60 days of filing Chapter 7 or before their reorganization plan is confirmed for Chapter 11

What Is An Executory Contract or Lease?

An executory contract is one that has been made but both parties still have not performed their obligations wholly or partially. Essentially, the terms of the contract are set to be fulfilled at a later date. If one party has fully completed their duties and the other still needs to pay, the contract is not considered executory but rather executed. 

Executory contracts are common between debtors and creditors. Other common types of executory contracts include:

  • Rental agreements - The tenant must pay rent in installments while the landlord must provide and maintain the living space
  • Car leases - The customer makes payments and the dealership continues to provide the car
  • Development contracts - The contractor performs building duties while the landowner provides payment, usually in installments 
  • Intellectual property licenses - Licensees can use the property within the scope of the license and the licensor will not sue for licensed uses

Executory Contracts in Bankruptcy

Executory contracts are given special treatment under the Bankruptcy Code. There are three ways executory contracts are treated differently from regular unsecured claims.

  1. Debtors get to decide whether to perform or refuse to perform their obligations under an executory contract
  2. While the debtor is deciding, the non-debtor party to an executory contract must continue performing their duties under the contract as if no bankruptcy has been filed
  3. If the debtor assumes the executory contract, they must pay in full and show they can do the same in the future. If they want to sell the contract to another party, they must cure any defaults and the buyer must show they can perform the contract in the future. 

In Chapter 7 bankruptcy, executory contracts must be assumed or rejected within 60 days of filing. In Chapter 11, it must be assumed or rejected prior to the time a plan of reorganization is confirmed. These dates are subject to change by the bankruptcy court. 

The specific rules governing executory contracts and bankruptcy can be quite complex. It’s highly recommended to work with an experienced bankruptcy lawyer who is able to help you navigate how these rules apply to your specific case.

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